Saturday, May 20, 2006

Inequality and the Budget Balance

When the rich get richer, so do the feds.

Today's Wall Street Journal reports:

As America's rich get richer, the taxes they pay on their increasing income is yielding a windfall for the U.S. Treasury.

The Bush administration and its supporters point to a recent surge in tax receipts as vindication of the 2001 and 2003 tax cuts that critics say favored the wealthy. And even opponents of the tax cuts acknowledge that the surge in unanticipated revenue is coming from the rich.

With wealthy Americans taking an increasing share of total household income and paying a greater share of total taxes, "what we're seeing is a repeat of the late '90s, where you get a flood of tax revenues from the hyper-rich," said Rudolph Penner, a former Congressional Budget Office director now at the Urban Institute think tank. "It may raise some worries socially, but it certainly is good for revenue."

Penner is right: Part of the movement from budget deficit to budget surplus in the late 1990s was attributable to increasing income inequality, which naturally interacts with the progressive federal tax system.

I don't recall seeing a good analysis of how much changes in income inequality have historically driven changes in the budget balance. If anyone is aware of a study of the issue, please let me know.